Dashing government hopes for an upgrade

Standard & Poor's affirmed India's sovereign ratings, welcoming the country's policy stability and improved monetary credibility, but ruled out any upgrade for this year or in 2017 because of weak public finances and low per capita income.

The stance comes despite a push for a ratings upgrade by government officials, who have argued the country has kept its fiscal deficit in check and passed a slew of major economic reforms including a revamp of the goods and services tax (GST).

But S&P on Wednesday stuck to its rating of "BBB-minus" with a "stable" outlook, saying it would need to see more efforts to lower the country's net general government debt level to below 60 percent of gross domestic product.

"The stable outlook balances India's sound external position and inclusive policymaking tradition against the vulnerabilities stemming from its low per capita income and weak public finances," S&P said in a statement.

"The outlook indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts."

S&P said its stance was based on its expectations that fiscal revenues would not rise enough to meaningfully reduce the country's deficit over the medium term, while noting the government's borrowing remained "high".

The ratings agency also expressed concerns the government could delay subsidy cuts, while noting the country's banking sector would likely need capital infusions of about $45 billion by 2019, or 2 percent of the country's GDP, to meet global Basel III capital norms.

"Overall, we believe public finances are set to remain key rating constraints for some time," S&P said.

Still, S&P welcomed government efforts to "address longstanding impediments to growth," including the passage of GST and other reforms such as in labour and the energy sector.

It also welcomed the Reserve Bank of India's action to reduce inflation and enhance its "monetary policy credibility," including through the introduction of a committee to set interest rates and improve communication.

Both S&P and Fitch Ratings currently rate India at "BBB-minus", the lowest investment-grade rating, with a "stable" outlook. Moody's Investors Service rates India at an equivalent "Baa3", but with a "positive" outlook.